Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle provides cloud, on-premise and hybrid applications, platform and infrastructure technologies, hardware, and related services worldwide. The filing covers the fiscal second quarter and first six months ended November 30, 2018, within fiscal 2019. Results are unaudited and fiscal 2018 comparative periods were recast for adoption of ASC Topic 606, Revenue from Contracts with Customers.
Key financial metrics
| Metric | Quarter ended November 30, 2018 | Six months ended November 30, 2018 |
|---|---|---|
| Total revenue | $9.562 billion | $18.755 billion |
| Operating income | $3.101 billion | $5.878 billion |
| Operating margin | 32% | 31% |
| Net income | $2.333 billion | $4.598 billion |
| Diluted EPS | $0.61 | $1.18 |
| Operating cash flow | Not separately provided | $7.268 billion |
| Capital expenditures | Not separately provided | $804 million |
| Free cash flow | Not separately provided | $13.770 billion on a trailing-four-quarter basis |
Quarterly revenue consisted of cloud services and license support of $6.637 billion, cloud and on-premise licenses of $1.217 billion, hardware of $891 million, and services of $817 million. The cloud and license business represented approximately 82% of total revenue on a trailing-four-quarter basis.
At November 30, 2018, cash and cash equivalents were $10.824 billion and marketable securities were $38.567 billion, for total cash, cash equivalents and marketable securities of $49.391 billion. Working capital was $36.623 billion. Current borrowings were $6.477 billion and non-current borrowings were $51.561 billion; the filing reports $57.9 billion of senior notes outstanding based on trading prices. Deferred revenue totaled $8.898 billion.
Material changes versus the prior comparable periods
- Second-quarter revenue declined 0.3% on a reported basis but increased 2% in constant currency; first-half revenue increased 0.3% on a reported basis and 2% in constant currency.
- Cloud and license revenue increased 1% in the quarter and 2% in the first half on a reported basis, or 3% in constant currency in both periods. Cloud services and license support revenue increased 3% in the quarter and first half on a reported basis.
- Cloud and on-premise license revenue decreased 9% in the quarter and 6% in the first half on a reported basis.
- Hardware revenue decreased 5% in both periods on a reported basis, while services revenue also decreased 5% in both periods.
- Operating income increased 2% in both the quarter and first half, while net income increased 5% in the quarter and 6% in the first half. Diluted EPS increased from $0.52 to $0.61 in the quarter and from $1.02 to $1.18 in the first half, aided by substantially lower share count following repurchases.
- The effective tax rate declined to 15.9% from 21.7% in the quarter and to 13.5% from 18.2% in the first half, reflecting the Tax Cuts and Jobs Act, jurisdictional mix, tax benefits, and a $153 million first-half benefit related to revised transition-tax estimates under SAB 118.
- Interest expense increased 9% in the quarter and 11% in the first half, primarily due to higher average borrowings.
- Operating cash flow decreased modestly from $7.416 billion to $7.268 billion in the first half. Investing activities generated $5.452 billion, compared with $7.528 billion of investing cash usage in the prior-year period, largely because of lower purchases of marketable securities.
- Financing cash use increased to $23.356 billion, principally because share repurchases increased to approximately $20.0 billion from $2.5 billion.
Guidance, outlook, commentary, risks and unusual items
- Management expects constant-currency cloud and license revenue generally to continue increasing, driven by cloud services and license support growth, continued license demand, and acquisitions. Oracle intends to maintain significant strategic emphasis on cloud offerings and continue investing in research and development.
- Remaining performance obligations were $30.1 billion at November 30, 2018; approximately 62% was expected to be recognized as revenue over the following 12 months. Seasonal contracting and revenue patterns are typically strongest in the fourth fiscal quarter and weakest in the first.
- Oracle initiated its Fiscal 2019 Restructuring Plan, with estimated costs of up to $432 million. It recorded $237 million in the first half and expected to incur approximately $195 million more through fiscal 2020, subject to revision.
- Oracle repurchased 415.3 million shares for approximately $20.0 billion during the first half. Approximately $9.8 billion remained available under the repurchase authorization at November 30, 2018. The company declared $0.38 per share of dividends during the first half and announced an additional quarterly dividend of $0.19 per share in December 2018.
- Oracle completed or made other acquisitions, including approximately $313 million of acquisition-related cash payments in the first half. Aconex, acquired in fiscal 2018 for approximately $1.2 billion, contributed acquired intangible assets and goodwill.
- The company adopted ASC Topic 606 using the full retrospective method. The reported historical adjustments were not material relative to amounts previously reported. Oracle also adopted several other accounting standards and is evaluating the future effects of standards covering leases, credit losses, fair value disclosures, retirement-benefit disclosures, and cloud-computing implementation costs.
- Oracle faces a $3.0 billion jury award in litigation brought by Hewlett-Packard Enterprise relating to software support for HP Itanium-based servers. Oracle appealed, has posted a bond, has recorded no amount for the award, and states that the outcome could materially affect future cash flows and results of operations.
- Tax authorities are examining Oracle and acquired entities in multiple jurisdictions. Significant disputes exist in countries including Australia, Brazil, India, Korea, Spain and the United Kingdom. Management believes adequate tax provisions have been recorded but cannot assure the ultimate outcome.
- Oracle reported effective disclosure controls and procedures and no material change in internal control over financial reporting. A subsequent filing correction stated that the GAAP growth rate for its two cloud ERP businesses was 34%, rather than the 32% non-GAAP rate cited in an earlier press release.
Important facts for investors to verify
- Reconcile reported growth with constant-currency growth and assess whether cloud growth offsets continuing declines in licenses, hardware and services.
- Review debt maturities, interest costs, refinancing needs, and the effect of the $4.5 billion long-term debt reclassification to current liabilities.
- Assess the sustainability of cash returns, particularly the approximately $20.0 billion first-half repurchase program relative to cash balances, operating cash flow, dividends and debt obligations.
- Monitor the $432 million restructuring plan, remaining charges, execution benefits and potential effects on headcount and margins.
- Evaluate tax-rate sustainability after the Tax Act, provisional SAB 118 adjustments, GILTI policy determination and ongoing tax examinations.
- Track the HP litigation appeal and potential exposure to the $3.0 billion award and post-judgment interest.
- Consider acquisition-related amortization, goodwill of $43.778 billion, and future intangible amortization estimated at $812 million for the remainder of fiscal 2019 and $1.500 billion in fiscal 2020.